Reaffirmation Agreement: Keep Your Car in Chapter 7 Bankruptcy

A reaffirmation agreement is a contract you sign during Chapter 7 bankruptcy. It keeps you personally responsible for a secured debt. Most people use reaffirmation to keep their car after filing bankruptcy.

The agreement lets you stay liable for the loan even after discharge. You keep making payments and retain the vehicle. Not all lenders require reaffirmation, but some do.

Some lenders let you keep your car without signing anything. You just need to stay current on payments. The choice depends on your lender’s policy and your financial situation.

Reaffirmation comes with real risks. You lose bankruptcy protections on that debt. If you fall behind later, the lender can repossess your car. They can also sue you for any remaining balance.

You have alternatives beyond reaffirmation. Options include ride-through, redemption, and surrender. Each path has different benefits and drawbacks worth considering.

What Is a Reaffirmation Agreement?

A reaffirmation agreement is a special contract during Chapter 7 bankruptcy. You use it to keep certain secured property, usually a vehicle. The agreement makes you personally responsible for the debt after bankruptcy ends.

Reaffirming a debt means you agree to keep paying it. Your other debts get wiped out, but not this one. These agreements are completely voluntary under bankruptcy law.

Most Chapter 7 cases involve reaffirming car loans. You can only reaffirm if you’re current on payments. The equity in your car must be fully protected by an exemption.

Equity equals your car’s market value minus what you owe. Exemptions are state laws that protect certain property amounts. They vary significantly depending on where you live.

By signing, you choose not to discharge that specific loan. In return, you keep the car while maintaining regular payments. Missing payments can lead to repossession and additional legal trouble.

Do You Have To Sign a Reaffirmation Agreement?

You don’t always need to sign a reaffirmation agreement. Some lenders require it if you want to keep the vehicle. Others let you keep the car without signing anything new.

Many lenders allow informal arrangements. You just continue making payments on time. They don’t pursue repossession as long as you stay current.

Whether you sign or not, payments remain essential. Falling behind risks losing the vehicle. Check your lender’s specific policy before making any decisions.

Steps To Reaffirm a Car Loan

Reaffirming a car loan follows five simple steps:

1. File Statement of Intention with your bankruptcy case
2. Wait for your lender to send the agreement
3. Complete and return the agreement plus Form 427
4. Attend a court hearing if filing without an attorney
5. Receive court approval or denial of your agreement

Each step has important timing and documentation requirements. Understanding the process helps you avoid costly mistakes.

How Reaffirmation Agreements Work

You tell the bankruptcy court about your reaffirmation intention. Fill out the Statement of Intention form with your initial paperwork. Send a copy to your lender as well.

The lender usually prepares the reaffirmation agreement. They send it to you or your attorney. Review the terms carefully before signing anything.

After signing, complete the financial information section. The form shows whether you can afford the payments. Then return everything to your lender for processing.

Important timing and requirements include:

• File the signed agreement within 60 days of your 341 meeting
• Attach Official Form 427 as a required cover sheet
• Explain any budget shortfalls if expenses exceed income

The 341 meeting is your meeting of creditors. It typically happens about one month after filing. Missing deadlines can prevent approval of your agreement.

Form 427 helps the court understand your financial situation. If your expenses exceed income, the form flags concerns. You’ll need to explain how you’ll manage payments despite the shortfall.

Courts call this a presumption of undue hardship. You must show realistic plans for making payments. The judge wants to ensure you’re not taking unmanageable risks.

What Happens at a Reaffirmation Hearing?

Filing without a lawyer triggers a mandatory hearing. The judge reviews whether reaffirmation serves your best interest. They ask questions about your financial capacity and understanding.

The judge considers several important factors:

• Whether you’re current on all payments
• How much the car is worth versus what you owe
• Your understanding of the agreement’s consequences

Judges can approve or deny your agreement. They might also suggest changes to your budget. Sometimes they approve with caution after confirming you understand risks.

The judge’s main concern is preventing future financial hardship. They want you to succeed with your fresh start. Reaffirming an unaffordable loan defeats bankruptcy’s purpose.

Even if the judge denies your agreement, you might keep the car. Some lenders allow continued payments without reaffirmation. Speaking with a bankruptcy attorney can help you understand your options.

What Happens If the Judge Denies the Agreement?

A denied reaffirmation means you’re no longer personally liable. The loan gets discharged in your bankruptcy. What happens next depends on your lender’s policies.

Many lenders still let you keep the car if you:

• Stay current on all payments
• Keep proper insurance coverage
• Haven’t defaulted on other loan terms

People call this arrangement a ride-through. While not officially recognized everywhere, it’s fairly common. Lenders prefer regular payments over repossession hassles and costs.

Some lenders have strict policies requiring reaffirmation. They may repossess even if you’re current on payments. State laws and lender policies vary significantly here.

Ask your lender directly about their post-denial policy. Some allow ride-through, others don’t. Knowing this information helps you plan alternative strategies.

Pros and Cons of Signing a Reaffirmation Agreement

Many people reaffirm because they need reliable transportation. They’re confident about affording the loan long-term. But doubts about the car’s condition or payment affordability require careful consideration.

Reaffirming helps you keep your vehicle after bankruptcy. The decision involves weighing significant benefits against real risks. Understanding both sides helps you make informed choices.

Pros of a Reaffirmation Agreement

The biggest benefit is keeping your car. Some lenders require reaffirmation as a keeping-the-vehicle condition. Without signing, they may repossess even with current payments.

Other common benefits include:

• Potential to negotiate better loan terms or lower interest rates
• Maintaining legal rights under your original loan agreement
• Keeping grace periods and reinstatement rights intact
• Added protection if your car has positive equity

Lenders sometimes adjust terms during reaffirmation negotiations. You might secure lower monthly payments or reduced interest. Most agreements keep original terms, but asking never hurts.

Reaffirming preserves your contractual rights with the lender. These include payment grace periods and repossession notices. You may also retain rights to catch up on late payments.

Cars with equity offer additional security. If you fall behind later, the car’s value may cover the loan balance. Repossession and sale might not leave you owing money.

Cons of a Reaffirmation Agreement

Reaffirmation removes a key Chapter 7 benefit. Your personal responsibility for the debt returns. The loan doesn’t get erased in your bankruptcy.

Falling behind later means your car can be repossessed. The lender can sue you for any deficiency balance. Deficiency is the amount remaining after selling the repossessed vehicle.

Court judgments allow wage garnishment or bank account levies. You can’t file another Chapter 7 for eight years. Reaffirmed car debt might leave you with few legal options.

Financial problems after reaffirmation create serious difficulties. You’ve used your bankruptcy discharge already. Managing unaffordable car debt becomes much harder without bankruptcy protection.

How Reaffirmation Affects Your Credit

Some people reaffirm to keep accounts active on credit reports. Reaffirming a car loan may continue lender payment reporting. Staying current helps rebuild credit after bankruptcy.

Reaffirmation isn’t the only credit-rebuilding method available. Not all lenders report reaffirmed debts to bureaus. Some stop reporting altogether after bankruptcy, despite continued payments.

Ask your lender directly about their reporting policy. Confirm whether they’ll report payments after reaffirmation. Building credit shouldn’t be your only reaffirmation reason.

Falling behind after reaffirmation damages your credit score again. Late payments and defaults hurt significantly. You remain legally responsible for the entire debt. Our partner Kikoff offers alternative credit-building options without reaffirmation risks.

Can You Cancel a Reaffirmation Agreement?

You can cancel a reaffirmation agreement after signing. Courts allow this even after judge approval. A very limited time window applies to cancellation.

You must cancel before whichever date comes last:

• 60 days after filing the agreement with the court, or
• The date your bankruptcy discharge is issued

Example: Your discharge happens 45 days after filing the agreement. You have until day 60 to cancel. If discharge happens at 75 days, that becomes your deadline.

Steps To Cancel a Reaffirmation Agreement

Canceling requires following specific legal procedures:

1. Write a cancellation letter to the creditor or their attorney
2. Send the letter by certified mail with return receipt
3. File a Notice of Rescission with the bankruptcy court
4. Include copies of your letter and delivery proof
5. Keep stamped copies of all filed documents

Your cancellation letter must clearly state your intention. Certified mail provides proof of creditor receipt. File everything at the same court handling your bankruptcy.

Keep stamped copies as your official proof. Documentation shows you canceled within the legal deadline. Consulting with a bankruptcy attorney can help ensure proper cancellation procedures.

Canceling a car loan reaffirmation may trigger repossession. Lenders might take the vehicle despite current payments. Consider this consequence before canceling your agreement.

Alternatives to Reaffirmation

Reaffirmation isn’t your only Chapter 7 car loan option. Several alternatives exist depending on your situation. Lender policies significantly affect which options work best.

Consider these alternatives:

• Ride-through arrangements
• Redemption by paying current market value
• Voluntary surrender of the vehicle

Ride-Through

Some lenders allow ride-through arrangements. You keep making regular car payments without reaffirmation. The debt itself gets discharged in bankruptcy.

Staying current and maintaining insurance keeps the vehicle. The lender doesn’t pursue repossession despite the discharged debt. Not all lenders permit this arrangement.

Policies vary based on location and lender practices. Ask your lender directly about their ride-through policy. Getting clear answers helps you plan appropriately.

Redemption

Redemption means buying your car for current market value. You pay the lender a lump sum equaling today’s car value. Paying less than the loan balance saves significant money.

People explore redemption when owing substantially more than car value. Cars significantly underwater on loans benefit most from redemption. Few people have available cash for lump-sum payments.

Some people get help from friends or family members. Specialized lenders like 722redemption.com offer redemption-specific loans. These loans specifically help with bankruptcy redemption situations.

Surrender

Surrendering your vehicle may be your best option. Unaffordable car loans or unreliable vehicles warrant consideration. The lender takes back the car when you surrender.

Your payment obligation gets wiped out in bankruptcy. Any deficiency balance also gets eliminated completely. Deficiency is what you’d owe after the lender sells the car.

Giving up a car can feel like a setback. It may open doors to better financial futures. Many people later purchase more affordable, reliable vehicles.

Cleared debt often means better loan terms afterward. Your improved financial situation helps with future purchases. Surrendering creates opportunities for manageable transportation solutions.

Can You Reaffirm a Mortgage in Chapter 7?

You can technically reaffirm a mortgage during Chapter 7. It’s rarely required and often not recommended by experts. Reaffirming mortgages creates significant long-term risks.

Reaffirming keeps you personally liable for the mortgage loan. The liability continues even after your bankruptcy discharge. Falling behind later allows the lender to sue you.

Lenders can pursue the full balance or deficiency after foreclosure. Many bankruptcy judges won’t approve mortgage reaffirmations. Judges especially deny reaffirmations for people filing without lawyers.

Most people keep homes after bankruptcy without reaffirming mortgages. Success requires:

• Staying current on all mortgage payments
• Keeping proper home insurance coverage
• Having enough exemption to protect home equity

Some mortgage lenders push for reaffirmation unnecessarily. They claim it’s required for credit reporting or refinancing. Reaffirmation isn’t legally required in most cases.

Many states have courts that won’t approve mortgage reaffirmations. The risks outweigh benefits in most situations. Speaking with a bankruptcy attorney for free helps you understand whether mortgage reaffirmation makes sense.